The Worst Is Yet To Come

I hate writing articles like this one. I am like everyone else in that I want to be happy. I want to be liked. I want to be the bearer of good news. I want everyone to be happy when I walk in the room....not running for the exits.

But the truth is this. There is a very strong case being made for a severe worldwide depression by some of the most intelligent and well-informed economists I know. Two of them are Nouriel Roubini and Bert Dohmen.


DR. NOURIEL ROUBINI
Dr Nouriel Roubini served in various roles at the Treasury Department, including Senior Advisor to the Under Secretary for International Affairs and Director of the Office of Policy Development and Review (July 1999 - June 2000). Previously, he was a Senior Economist for International Affairs on the Staff of the President's Council of Economic Advisors (July 1998 – July 1999).

Currently, Professor Roubini is a Professor at the Stern School of Business at New York University. He has also held teaching positions at Yale University.


New York Times August 15, 2008 excerpt from article entitled Dr. Doom

"On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac."

At present, all of these have happened. However, there is more.

"Following the Fed’s further extraordinary actions in the spring — including making lines of credit available to selected investment banks and brokerage houses — many economists made note of the ensuing economic rally and proclaimed the credit crisis over and a recession averted. Roubini, who dismissed the rally as nothing more than a “delusional complacency” encouraged by a “bunch of self-serving spinmasters,” stuck to his script of “nightmare” events: waves of corporate bankrupticies, collapses in markets like commercial real estate and municipal bonds and, most alarming, the possible bankruptcy of a large regional or national bank that would trigger a panic by depositors. Not all of these developments have come to pass (and perhaps never will), but the demise last month of the California bank IndyMac — one of the largest such failures in U.S. history — drew only more attention to Roubini’s seeming prescience."

"What economic developments does Roubini see on the horizon? And what does he think we should do about them? The first step, he told me in a recent conversation, is to acknowledge the extent of the problem. “We are in a recession, and denying it is nonsense,” he said. When Jim Nussle, the White House budget director, announced last month that the nation had “avoided a recession,” Roubini was incredulous. For months, he has been predicting that the United States will suffer through an 18-month recession that will eventually rank as the “worst since the Great Depression.” Though he is confident that the economy will enter a technical recovery toward the end of next year, he says that job losses, corporate bankruptcies and other drags on growth will continue to take a toll for years. "


Dr. Roubini went on to tell his audience that a "global meltdown" and "generational crisis" was coming.

And this, from the The Sunday Times, October 26, 2008: “Nouriel Roubini: I fear the worst is yet to come.”

So far, he has been dead on with every forecast, including this technical recovery we are seeing right now.

Bottom line: Roubini see a depression coming that will last years, result in job losses, bank failures and falling asset prices.



BERT DOHMEN

For the past 30 years, Bert Dohmen has authored the Wellington Letter, and is often quoted in the Wall Street Journal, Barrons and Investors Business Daily. He has advised Presidents Reagan, Carter and Ford. He is a frequent guest on Louis Rukeyser's "Wall Street Week," CNN's "Moneyline," and many others.


From Bert Dohmen's Wellington Letter, October 27, 2008

"The big problems are still ahead. Whereas all the focus until now has been on the financial system, the next round will be the imploding economy, plunging earnings, corporate bankruptcies, soaring unemployment, etc. It won't be pretty."

"When we headlined the Wellington Letter of April 2007, "THE MAKINGS OF A PERFECT FINANCIAL STORM," we listed all the bubbles that would be imploding, leading to a potential meltdown in the fall of 2008. So far, the relatively easy bubbles have popped, such as CDO's, subprime mortgages, write-offs of bad paper assets and loans, etc. For us, it's been a U.S. domestic problem that has gotten the attention of Washington. Although these bailout efforts and guarantees are now probably above $2 TRILLION nothing has worked to stem the crisis. It's getting worse, the stock market is at new bear market lows and the panic is in full swing. But those were the domestic problems. "

"Now come the much bigger problems: Debt defaults by entire countries. Whereas in the past, we had emerging country crises triggered by one country, such as 1997 and 1998, this time it's a whole alphabet soup of countries simultaneously. How will the IMF, or any organization, handle that?"

Regarding gold, Bert comments that gold will continue to stay subdued for the near term while investment firms are forced to sell their gold holdings to raise cash to cover their other losses. However, after this "you will be able to buy gold for one of the most spectacular upmoves in history."


My Conclusion
Both of these advisors have been consistently right in their economic forecasts for many years. They often go against the Wall Street consensus, as they are so doing at present.

My expectation going forward is an economic decline which will lead to stock market declines, interest rate declines and job losses.

The only protection for investors will be to harbor the bulk of their assets in gold, or gold pool accounts.

Do not buy stocks. Do not keep any more of your assets in the banking system that you may need over the next 6 - 12 months, as FDIC is already insolvent. The president of Bank of America stated recently that he expects about half of the banks in the US to fail over the next few years.

Intermediate term funds should be invested in US Treasury money markets or mutual funds only. Longer term funds could be invested in Treasury bonds, as yeilds are expected to decline, forcing prices upwards.

Shorting the dollar should once again become profitable when the next leg of the decline resumes. This can also be easily done in a pool account.


So regardless of my negative outlook, I would like to point out that more people became millionaires during the Great Depression than in the booming 20s that preceeded it.

I believe this coming crisis will be VERY profitable for those who are prepared for it, and ruinous for those who are not.

In the meantime, don't let this temporary stock market recovery fool you. This is a normal bear market rally. Use it to sell stocks, not buy.

I expect the next gold move up to approach the $2,000/ounce level, even though it may get as low as the high $500s for a short while.

To contrarians like myself, things have never looked better! For everyone else, the worst is yet to come.